| I often struggle to distinguish the line between economic reality and perception (as evident in my frequent bouts of verbal head-scratching over the Fed's pronouncements). And I'll never forget my first professional bout with what smarter folks than me label "market psychology" (and then call it a day). This occurred in the early 1990s, when I came across a front-page article in the WSJ that said IBM's stock was a buy even though the company was struggling, not because the price was so cheap but because so many investors thought it was. (Naturally, I'd just finished editing an article that pooh-poohed that very idea, based on how IBM's stock was trading in relation to its financial performance.)
Call my mistake, if that's what it was (the stock did go up, at least for a while), a failure to appreciate the financial version of the Heisenberg effect. To loosely encapsulate that German scientist's theory, perception can change reality. The origins of my notion that the theory seemed to apply as well to economics, I have to say, came from an observation made by my old friend and colleague Peter Maloney of McGraw-Hill's Global Power Report during one of our frequent five-dollar al fresco lunches in then-newly-restored Bryant Park. But now it occurs to me maybe the Fed should start hiring physicists as well as economists, because there seems to be no end in sight to the phenomenon.
Fresh evidence comes today via this article in the Times. Housing starts, it says, were down in December for the third month in a row (and the trend seems to be accelerating). And the reporter acknowledges the economy's heavy dependence on this sector, though the article fails to point out why — a big chunk of employment growth during the current recovery has come from this single industry. But then the reporter dutifully relates that the industry trade group that produced the numbers contends that "a fundamentally strong economy" will help keep housing sales generally steady.
Huh? (Sorry, but the article fails to note the contradiction, much less explain it.) |
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